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The Fool Portfolio

ALEXANDRIA, VA (Feb. 5, 1998) -- Unfortunately for all of us, our
reporting on (please read the next three words very seriously and
in a deep voice)
"Market Under
Siege" has come to an abrupt end. Yes, day seven of (do so once again)
Market Under Siege was not meant to happen. Not this time, anyway. The Fool
Port lost to both indices on weakness in America Online, 3Com, and Amazon.

On Tuesday
we looked at Amazon's fourth quarter and 1997 results, running through revenues
and looking at costs, and I promised to wrap this up today. Our first day
of study now brings us to the loss from operations on the income statement,
which was $9.8 million last quarter, or 14% of revenue. This compares to
a $9.1 million loss in the third quarter, or 24% of revenue.

Here's the deal:

Imagine two paths out in the woods. You're in a helicopter looking down on
the paths, so you can see where they start and where they end, despite all
the trees. You can also see where the two paths merge somewhere in the middle
of the woods. Now, Amazon is increasing revenue while decreasing expenses
as a proportion and in absolute terms as well -- in some cases -- and so
at some point (it's hard to guess when, but some people think within the
next 18 months) these two paths will cross and Amazon will be making money
on operations. The loss will turn into a gain.

In 1997 the company lost $29 million on sales of $147 million. Importantly,
where did the loss come from? For the year, Amazon spent $38 million on
advertising and $12 million on product development. But get this: Amazon
spent a mere $6.5 million on general and administrative expenses. That's
4.4% of sales. Compare that to Borders Group(NYSE: BGP), a company
that in the first nine months of 1997 spent $339 million in selling and
administrative costs on $1.4 billion in sales, or a whopping 24% of
sales.

Now, which is a leaner business model? And so if Borders can make money annually,
don't ya think that Amazon eventually will be able to as well?

Naw. Come on!

Of course it should. Eventually.

Moving from the income statement to the balance sheet, we see that Amazon
has $124 million in cash and equivalents, but it now has $76 million in long-term
debt where it used to have none. Remember that in the last quarter the company
took on some financing. For now, that's probably better than diluting the
stock by selling more shares. Especially since debt in general can be had
inexpensively these days with interest rates so low.

We also see that inventory is relatively low, at under $9 million (low inventory
is good), and accounts receivable is all but non-existent because the company
collects payment on a sale immediately. This is excellent -- a Dell Computer
type arrangement. Also, accounts payable are $32 million. This is good too,
believe it or not. We'd rather see the company delay payment and use its
cash for its own good and pay as slowly as possible -- as long as we know
that it can pay and isn't struggling.

At $59 per share Amazon trades at a market cap of $1.4 billion, or 9.5 times
sales of $147 million. If the company can grow sales, say, 40% this year
to $205 million (and I think that's being conservative seeing how quickly
online commerce is growing), we have a current stock price at 6.8 times sales.
If Amazon grows sales 60% to $235 million, the stock is trading at 5.9 times
sales. If it doubles sales? 4.7 times. What is a fair price? You tell us.
Whatever it is, the stock is much more reasonably priced than most Internet
companies that have made a name for themselves. And the future of the Internet
is probably much larger than we think. Think ten years from now, not three.

Well, now do think "three." Think 3Com(Nasdaq: COMS). The stock fell
today despite news that the company agreed on a 56K standard with other industry
leaders in Switzerland. 3Com also won a Gigabit Ethernet Tester's Award.
3Com is the market leader in ethernet networking. At $33, the stock trades
at about 33 times earnings estimates for the year ending in May, and 17 times
May 1999 estimates. Let's call that an aggressive estimate, though, just
to be safe. We'll see how things unfold. Worthwhile shareholder value is
not usually built in one year alone, anyway, so any expectations for such
an event should be tempered -- unless the company in question is Iomega in
1994 and 1995. And 1996.

There is plenty else in the Hall
of Portfolios tonight, with the
Boring
Portfolio writing about Carlisle Companies(NYSE: CSL) (Carlisle
is a great company, if I do say so myself), and Tom is in the
Cash-King
Portfolio explaining the latest transaction or lack thereof, and preparing
to announce another buy on Friday. Next, in the
Drip
Portfolio today I continue with a close look at Intel (Nasdaq: INTC), trying to explain the "mysteries" of its massive cash build-up, and
in the Foolish Four
portfolio Robert continues to write about the lessons of long-term Dow Dog
investing.

To close, on a whim on Tuesday I asked for examples of businesses that require
absolutelyno employees, and I received some interesting email
responses. One very Foolish response came from a Fool that I'll identify
as simply Ed. Ed wrote:

"I own a company with no employees. It's called my portfolio. Starting up
it did take some effort, but now I just ignore it and every few months look
at these statements that get sent to me in the mail and see how much money
it made.

"Each share in this company costs one dollar -- I buy a few more shares every
month. Last year it earned a little over 30 cents a share, and has already
earned 7 cents a share so far this first quarter. It doesn't pay a dividend
-- all its profits go right back into the company.

"You could call ME an employee of this company, but I prefer to call myself
the employer -- my portfolio works for me, not the other way around.

"- Ed"

Fool on!

--Jeff Fischer (Unfortunately no longer a part of Market Under Siege
-- for now anyway!)